The India - Solar Cells Case (DS456)

For those of you interested in the India - Solar Cells WTO dispute (DS456), Indian attorney Srikanth Hariharan has offered some commentary. Two things to note. First, I couldn't make his footnotes come through. And second, I haven't thought about the case yet, and I'm not endorsing his conclusions -- just wanted to put them out there.

India-Solar Cells and Canada-Feed in Tariff- Will the Sun Shine for Subsidies?

1. INTRODUCTION

The India-Solar Panel dispute was initiated by the United States of America through request for consultations dated 11 February 2013 alleging that India requires solar power developers or their successors in contract, to purchase and use solar cells and solar modules of domestic origin in order to participate in the Jawaharlal Nehru National Solar Mission (“NSM”) and to enter into and maintain power purchase agreements under the NSM or with National Thermal Power Company Vidyut Vyapar Nigam Limited. As a result, solar power developers, or their successors in contract, receive certain benefits and advantages, including subsidies through guaranteed, long-term tariffs for electricity, contingent on their purchase and use of solar cells and solar modules of domestic origin.

This note is a brief analysis of the measure at issue and its compatibility with the covered agreements. This paper majorly analyzes the compatibility of India’s national solar program with Subsidies and Countervailing Agreement and Article III:4 GATT 1994.

2. RELEVANT MEASURES

1. Under the NSM scheme, the solar photovoltaic and solar thermal are the two types of solar power projects which are the subject matter of the measure.

2. The measure proposes a bundled mechanism for relatively expensive power with relatively cheaper unallocated quota of Government of India generated at NTPC coal based stations which would be subsequently procured by National Thermal Power Company Vidyut Vyapar Nigam Limited at prices determined or regulated by Central Electricity Regulatory Commission. This will bring down the gap between the average cost of power and sale price of power.

3. The measure purports to allocate for each MW of installed capacity of solar power an equivalent amount of MW capacity from the unallocated quota of NTPC coal based stations.

4. One of the major objectives of the measure is to promote domestic manufacturing.

5. Firstly, the measure makes it mandatory to be considered under the scheme for all the Solar PV projects to use cells and modules manufactured in India(100% local content). However, the measure allows for PV Modules made from thin film technologies or concentrator PV cells may be sourced from any country for use in Solar PV projects. The measure also posits that Projects offering the maximum discount (range of 10% to 25%) in Rs/kWh on the CERC Approved Applicable Tariff would be selected first.

6. Secondly, as regards solar thermal projects the project developers are to ensure 30% of local content in all plants and installations under solar thermal technology.

7. The Solar Power Developers are entitled to enter into Power Purchase Agreements with the Government owned nodal agency NVVM who would purchase the electricity produced.

3. COMPATIBILITY WITH SUBSIDIES AND COUNTERVAILING DUTIES AGREEMENT

3.1 Is it a Subsidy?
A measure to constitute a subsidy under Article 1.1 of SCM, as propounded in Canada-Aircraft two essential ingredients need to be satisfied:

-
a. There should be a financial contribution or direct transfer of funds or purchase of goods.
And

b. A benefit should be conferred.

In considering the whether to categorize the measure under one of heads of Article 1.1 (a), it was argued by Japan in Canada Feed-in-Tariff that they are mutually exclusive. However, the Appellate Body by relying upon US- Large Civil Aircraft rejected that argument and held that Article 1.1(a)(1) "does not explicitly spell out the intended relationship between the constituent subparagraphs" and that its structure "does not expressly preclude that a transaction could be covered by more than one subparagraph.”

In the present case, however, the Bundling scheme provided by the India under NSM does not infuse any funds into the recipient in exchange for certain obligations to the government. This is also because a potential direct transfer of funds" under subparagraph (i) "may involve reciprocal rights and obligations", given that it covers situations where the recipient assumes obligations to the government in exchange for the funds provided, such as loans and equity infusions.

As in the case of Canada-Feed in Tariff, India-Solar Cells is also a case where there is a government purchase of goods. Since, as in Canada so in India, there is a heavy governmental interference in solar energy market, one may not be able to rely on market benchmarks to determine prices. However, the peculiarity of the situation in India is that though the prices of solar energy is regulated by the CERC, its determination is based on sound financial and commercial principles. Since, the market in India is distorted, the Appellate Body has also recognized in US-Softwood Lumber IV that such a market cannot be used in a proper comparison. Moreover, the market in USA is also distorted as there is heavy subsidy that is given to the solar energy sector and so cannot be a reliable tool for comparison of prices based on market benchmarks.

In Canada-Feed In Tariff, the government purchased the electricity from the power developer and remunerates the producers who enter into FIT contracts. However, the scheme in India is different. Here the solar power producers, in order to avail the facility of the Bundling scheme, shall sell the electricity to the government appointed nodal agency at prices determined by the market regulator. So, this is a case where there is an independent market regulator sets the prices at which the government can purchase. Hence, India-Solar Cells may not be a case of subsidy. This is so because though there is a purchase of electricity by the government, the government is paying a price determined by market regulator, which is also the case in case of other sources of renewable and non-renewable energy.

4. COMPATIBILITY WITH ARTICLE III OF GATT 1994

Article III:8 is an exception to Article III:4. The Appellate Body in EC-Tariff Preferences tried to reason with respect to the exception contained in the Enabling Clause as regards the MFN obligation that the general rule of most-favored nation treatment could be departed from only in the case of satisfaction of the exception contained in the Enabling Clause. Drawing an analogy from that case, though not expressly referring to EC-Tariff Preference, the Appellate Body in Canada-Feed in Tariff adopted the same formula for assessing the compatibility of the domestic content requirement with Article III of GATT 1994.

Though the Appellate Body in Canada-Feed in Tariff did not strictly adopt the two-step approach of determining the compatibility of the measure with Article III, it presumed a violation of Article III:4 and went ahead to assess whether the violation could be justified under Article III:8. It may be suggested here, in all cases a sweeping presumption that domestic content requirement would violate Article III:4 cannot be made and it is the duty of the Panel/Appellate Body under Article 11 of DSU to objectively assess the violation of Article III;4 as it has duty equally to objectively justify the violation under Article III:8.

For a measure to fall within the scope of Article III:8, there are three requirement which have their evolving jurisprudence in Canada-Feed in Tariff :-

1. There should be an articulated connection between the laws, regulations, or requirements and the procurement, in the sense that the act of procurement is undertaken within a binding structure of laws, regulations, or requirements.

2. The government or governmental agency should through a process acquires products.

3. The governmental agency is determined by the competencies conferred on the entity concerned performing governmental functions and whether that entity acts for or on behalf of the government.

4. The purchase should be made for governmental purposes, which the Panel in this case, held that it should be interpreted in juxtaposition to the expression ‘not with a view to commercial resale or with a view to use in production of goods for commercial sale.’ There should be governmental aim or objective with respect to purchases by governmental agencies. It refers to what is consumed by government or what is provided by government to recipients in the discharge of its public functions. There should be rational relationship between products purchased and the governmental function discharged.

5. The purchases should be for governmental purposes and not for commercial resale cumulatively.

6. While assessing the requirement of commercial resale it is necessary to assess whether the relationship between the seller and the buyer is at a arm’s length and the buyer seeks to maximize his or her interest.

Coming to the present dispute in hand of India-Solar Cells, it is to be noted here that this is just a policy of the government to attract private solar power developers and does not fall under the term laws or regulations. However, if the private solar developers opt for this policy the they are entitled to some benefits like compulsory purchase by NVVM. Hence, this can be categorized as under the word ‘requirment’. The NSM is also a process through which the government acquires products. Moreover, the NVVM is the nodal agency for Government of India to procure solar power under the NSM and also it is a 100% government owned subsidiary.

As regards the requirements in points 4,5 and 6 referred above, it is to be noted here that the policy of the government is to mix the supply of the power produced under the NSM with the unallocated power of the Central generating stations. It is to be emphasized here that such power is allocated only to States or Union Territories in emergency situations. Hence, it cannot be said that the procurement is not for governmental functions or that such procurement is for commercial resale. Since, the government is procuring this electricity for discharge of public function of providing to the States as per their necessity, there is a rational relationship between the product and the public functions of the State. However, the counter argument for this could be that the provision of Article III:4 is aimed to prohibit discriminatory treatment within the territory of the member. However, it is suggested here that we are looking at the exception under Article III:8 and if the measure falls within that provision then violation of Article III:4 is justified.

Hence, in the case of India-Solar Cells, it is seen from the above that the measure could be justified under Article III:8 for violation of Article III:4

5. CONCLUSION

India-Solar Cells is compatible with the provisions of the SCM Agreement and Article III:4 more particularly the bundling scheme adopted by India to attract private players into the solar power sector. However, in May 2013, the government as part of its NSM has introduced a viability gap funding program, which is still in the consultation stage. It remains to be seen the compatibility of the VGF scheme with the provisions of the SCM agreement, as the government proposes to transfer some part of the funds allocated to the NSM directly to the power developers.

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The India - Solar Cells Case (DS456)

For those of you interested in the India - Solar Cells WTO dispute (DS456), Indian attorney Srikanth Hariharan has offered some commentary. Two things to note. First, I couldn't make his footnotes come through. And second, I haven't thought about the case yet, and I'm not endorsing his conclusions -- just wanted to put them out there.